Pound Sterling is climbing against the South African Rand (ZAR) for a third consecutive day confirming an interim floor has been put in place in the R17.59 vicinity.
GBP/ZAR has risen to 18.15 at the time of writing having bounced along the mid-17.00's for the past ten days.
That the Pound has refused to close below 17.50 suggests to us we could be seeing an interim floor to the September decline being put in place.
We note that there are some important resistance points lying ahead which could halt the rally.
The descending 20 and 50 day moving averges loom large at 18.32 and 18.26 respectively.
Should GBP/ZAR break above these points then the near-term outlook will have turned decidedly positive.
Concerning the dominant downtrend, in place for much of 2016, our studies suggest a break below the 17.45-17.50 lows would probably lead to an extension lower, down to the next target at 17.12.
Beyond here look for the 2016 lows around 17.00 to be tested - this should offer notable support for the pair as it would appear to the line-in-the sand for the exchange rate set in the wake of the EU referendum.
Sentiment Keeps ZAR Supported
We believe any breakout in GBP/ZAR will likely be lower at this stage, particularly if we consider the fundamental backdrop to GBP and ZAR.
A global pick-up in investor sentiment has kept the Rand well supported of late.
The rally in commodity prices and global stocks on Wednesday-Thursday prompted by the OPEC announcement to cut back production has also aided the high-yielding commodity-orientated Rand.
Given the US Fed’s hesitation in the deciding when to raise interest rates, and possibility they might not be increased by December, the outlook from that perspective appears positive.
Because world financial markets are so dollar-centric and much emerging market debt is denominated in dollars or originates from the US, a rise in US interest rates, borrowing costs and the more expensive Dollar, which would result are all cause for concern from a global perspective.
The ZAR could suffer if we get any indication the US Fed will raise interest rates sooner than December.
Another factor supporting the rand it the survival of Finance Minister Pravan Gordhan, who it had been feared would be arrested on charges of setting up an illegal tax investigation unit when he was director.
Gordhan is the seen as a strong Finmin and his departure would have been a major blow to the economy and the rand.
Pound Unlikely to Rally Anytime Soon
The Pound has been supported by relatively strong data of late, which seems to show the economy in rude health after Brexit.
However, headwinds continue to blow.
Sterling should be higher were it not for growing speculation that the government is gearing up for a complete withdrawal from Europe, including the trading club element called the common market.
International Trade Secretary Liam Fox has now sought for the UK to become an independent member of the World Trade Organisation - some would argue this is a pragmatic development but according to analysts at Citibank it could be seen as, “a clear signal of preparing the ground for an 'hard Brexit', which would involve leaving the EU’s single market entirely.”
The problem for Britain is that access to the EU's single market also requires the handing over of inter-European immigration controls, which is at odds with the sovereignty desired by the majority who voted for Brexit.
The issue has also been highlighted by Switzerland whose government has been making efforts to negotiate tighter immigration controls whilst maintaining access to the common market.
In the Swiss case, the EU would not budge on the principle of freedom of movement, so the Swiss had to hold a referendum on whether to quit the common market or tighten immigration controls.
“The Swiss parliament has chosen continued access to the EU’s single market over immigration controls demanded by a 2014 referendum, after unsuccessful negotiations with the EU. This points to a tough EU stance and difficult negotiations ahead for the UK as well,” argue Citi.
Indeed, we have heard from many analysts over recent days that one of their core reasoning for expecting a weaker British Pound remains the uncertainty posed by the difficult Brexit negotiations that lie ahead.
Continue to watch the newswires for further developments on this story as we expect GBP to remain sensitive to such headline risks.